Three Keys to Playing This Volatility

[Excerpted from Bill Cara's Daily Report]

There is no change in the underlying drivers in the equity market: (i) low volume, (ii) forced selling of under-margined and mutual fund-related accounts, and (iii) a slow acquisition of long positions by private capital and the strongest of the hedge funds.

The cycle bottom process may take until the end of tax-loss selling season in late December. In the meantime, being “nimble” is the key to success.

An observation I had watching Bloomberg TV is that investment analysts and talking heads are more down to earth, giving us less hype. It’s clear that there is no consensus decision by the heavyweight capital managers to move the market higher.

The best play in this market is to sell volatility and use the options market time decay to your advantage.

But, there is a selective repositioning of portfolios underway, which I see from the Effective Volume studies of my Belgian-based associate Pascal Willain.

Also, there are three keys to playing the volatility: (i) the T-Bill yield, which tells you about money flowing into or out of safe haven of the U.S. Treasury, (ii) the share prices of the oligopolist base metal miners like BHP, Rio Tinto (RTP), Vale (RIO), and Xstrata (XSRAF.PK), and (iii) the share prices of the major Chinese/Brazilian oil companies versus Exxon (XOM) and Chevron (CVX).

I now believe that the most likely case for equity market prices is that they will be held in check by embattled fund managers until late December. A volume break-out will be the key to the price break-out.

Comments

[dr.doolittle:]

as usual, great stuff. I'm very bullish which is clearly contrary to the "talking head" signal you have referenced. No doubt tax selling is under way as well. Still, at some point the "commodity collapse" will abate in the sense that the mining of base metals and creation of base commodities such as steel will assume their traditional role as being subservient to users of these materials to make "practical" or "material" things which can be sold at a much higher profit than the actual commodity itself thus providing a base both for the manufacturer and the base commodity itself. As a lone bull out here I cannot point to anything economically that sustains my case other than there's been a collapse and therefore one can argue historically a recovery results from these things. Having said that it would appear the Russians are in the process of devaluing the ruble which in my view is very bullish for equities (Catepillar for example, or Wal-Mart), especially of an American kind and makes commodity producer nations with political economies oriented towards production at the expense of the consumer the wrong place to invest whereas consumer oriented political economies with a disdainful eye towards commodities the right place to invest (we'll ignore the rule of law for now.) I think the US is the latter and I have taken note that the dollar is strong while gold has weakend and oil prices have completely collapsed, all bullish both currently and should it be sustained for the future as well. I still struggle to find value in day trading and "market timing" for even well heeled investors. It has this celebration of anarchy kind of feel to it which is simply not what's going on in the world at all financially (indeed politically it feels more like fascism and creation of a third Reich), especially relative to the ongoing infusion of trillions of dollars of capital directly into private financial institutions worldwide.

2008 Nov 12 10:52 AM